OH GRAEV, WHERE IS THY VICTORY?

The answer to that question, which I paraphrase from a much more exalted source than my blog, the United States Tax Court, or even 2 Cir, seems to be in Judge Holmes’ prose, unbroken even by a disrespected partitive genitive.

Joe C was a man of many entities, like C Corps, S Corps, partnerships and LLCs. Mostly they served as hidey holes for Joe C to stash cash from his tax preparation business. Joe C had his CPA licensed yanked a couple times (hi, Judge Holmes), and was denied EA status on that ground, even though he passed the four-part SEE.

Joe C avoided the RAs sent to examine his tax posture, and his trial testimony varied from whatever papers he had. Moreover, his papers were fine examples of creative writing.

Forty-nine (count ‘em, forty-nine) pages into the saga of Joe C’s delictions in the US of A and the Philippines, Judge Holmes comes to the inescapable conclusion.

“Mr. Becker’s trade was tax preparation, but he failed to properly report his own tax. And for many of his entities he filed no tax returns at all. It’s unlikely that a tax professional such as he would accidently [sic] or even negligently report (or not report) his taxes in this manner. We find instead by clear and convincing evidence that Mr. Becker attempted to use his vast tax-preparation experience to help him evade his own legal obligations.” 2018 T. C. Memo. 69, at p. 49. (Citation omitted).

“All of this would normally lead to a holding that sustains the Commissioner’s civil fraud penalty determinations…. But we held in Graev III, 149 T.C. at______ (slip op. at 13-14), that compliance with section 6751(b)(1)–which requires written supervisory approval of an initial penalty determination–is part of the Commissioner’s burden of production on penalties under section 7491(c). The Commissioner never even mentioned section 6751 before or at trial even though Mr. Becker and Ms. Castro put the penalties at issue in their pleadings and hotly contested them on their merits. Today we denied the Commissioner’s motion to reopen the record.

“This makes these cases among those that have to consider what consequences such failures to anticipate Graev III have. Section 6751 has been in the Code for nearly 20 years. Graev III didn’t create new law; it interpreted a section of the Code that was in existence at the time of the trial in these cases, and we didn’t say that our interpretation had only prospective effect. See, e.g., Harper v. Va. Dept. of Taxation, 509 U.S. 86, 97 (1993) (when the Court applies a rule of federal law in a case, that rule ‘must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate * * * announcement of the rule”); Hajro v. U.S. Citizenship & Immigration Servs., 811 F.3d 1086, 1099 (9th Cir. 2015) (“Silence on the issue [of prospectivity] indicates that the decision is to be given retroactive effect”).

“These precedents mean that we have to treat our construction of section 6751(b)(1) in Graev III as being the correct construction of that section as of the date of this trial as well. But Mr. Becker and Ms. Castro didn’t mention section 6751 either. Might this mean that the Commissioner could still win on the penalty because it was not placed in issue?” 2018 T. C. Memo. 69, at pp. 49-50.

Nope.

“Because section 7491(c) places the burden of production for any penalty or addition to tax on the Commissioner, we held that the Commissioner must lose when there is no evidence in the record that he met these prerequisites.” 2018 T. C. Memo. 69, at p. 51.

And there’s no reopener because, even though to reopen might change the outcome, IRS had no Section 6751(b) Boss Hoss sign-off to put in.

An author, teacher, advocate and trusted advisor, Lew Taishoff is a New York City-based attorney with 51 years of experience in corporate and individual tax and real estate matters. He is an Enrolled Agent, examined and admitted to practice before the Internal Revenue Service, and admitted to practice before the United States ... Continue reading →